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March 7, 2014

What can I say to yesterday’s news headlines? I’m certain that about the time I admit I have been wrong and that our monetarists, our remarkable central bankers, have been right all along, I will be proven wrong for saying I was wrong. It has been almost exactly five years since this current bull market first caught fire. On March 10, 2009, the S&P 500 opened at 679 points. Yesterday it closed at 1877! That is an astounding 1200-point gain, or a near-tripling of the S&P! Did I ever think this would happen? Only in one scenario, and that scenario would have been where the average price of a loaf of loaf of bread was $15 and gas at least $10 per gallon — the COSTCO price of course.

So what is the explanation, other than the fact that my hypotheses have all been completely wrong? I have sat through three investment reports recently and the standard opinion is that we will see slow, steady growth. Those giving the report are all extremely bright and intelligent investment professionals for whom I have a great deal of respect. It seems that in the world of finance everything is under control. “Yes there are some headwinds, but everything is tracking and the central banks will normalize policy and rates in due time.” Certainly in the world of finance this position appears to be clearly supported by the markets. It makes one wonder if it is true that debt doesn’t matter, that there is no downside to unprecedented liquidity and the monetizing of debt, and deregulation, creating too-big-to-fail banks and other moral hazards. So is it time to throw in the towel or is there some other explanation?

I feel a little like Harold Camping right now. For those of you not familiar with that name, Mr. Camping predicted the rapture, or the end of the world, several times and then when his prediction did not come true, he had a reason for misinterpreting the date and would give a new date — and people would actually believe him! I have stated that we cannot continue with the economic and monetary policies we are employing and not suffer some kind of event — ok maybe not the rapture event, but some extreme economic consequences. Ironically this is what appears to be happening in the emerging economies. So, why has the United States been exempt? It is because the money multiplier, or velocity of money, has been nonexistent. Massive amounts of liquidity have been jammed into the financial markets, which has not made it into the larger economy — the one you and I participate in. Corporations and Wall Street banks are sitting on record levels of cash. The money held with the Federal Reserve is at all time record highs. It has never made sense to me that the Fed loans money at zero and then turns around and pays interest to the very same financial institutions that borrowed from their record setting balance sheet. Let me summarize: Hit print on the money printing machine, give trillions of dollars to Wall Street banks for free, and then pay them interest on the money you just gave for free when they turn around and deposit it back with you. No wonder Wall Street can’t lose — what a racket. As long as you can be guaranteed to make money by borrowing money, why would anyone risk loaning that money out to you or me? That is how you can have record-setting debts and record-setting printing of money and on the flip side have record-setting lows in the money multiplier and record-setting financial markets.

But here is the biggest challenge: Main Street is feeling the pinch more than ever. Even though the official numbers say unemployment is improving (declining), we have the lowest level of labor participation (the percentage of Americans working) in our history. You ask, “How can unemployment be dropping and labor participation also dropping?” What an astute question. I’m glad you asked. The unemployment number has largely improved because the Department of Labor claims employees are voluntarily dropping out of the workforce through retirement, disability or discouragement. It seems there are two very different worlds developing right now: the top end of the corporate and financial worlds vs. the middle class. One guess who is winning in these two worlds. Last quarter, personal income dropped for only the second time in more than 60 years. The only other time was during the 2008/09 recession. The working family is going backwards in spite of all the hoopla about the monetary and economic policies being implemented to help Main Street.

Ironically, I think there are two things that are saving us right now: the first is the lack of money velocity that has kept the dollar from collapsing; second, we have somehow remained the world currency, which means we can get away with printing endless sums of money. I would be worried if either of these conditions changes.

Even Big Bird is feeling the pinch!


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